Cablegate: Us Treasury Tax Program Terminated - Work Still to Be Done

VZCZCXRO5764
RR RUEHROV
DE RUEHDS #3323/01 3181057
ZNR UUUUU ZZH
R 141057Z NOV 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 8553
INFO RUCNIAD/IGAD COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 003323

SIPDIS

TREASURY FOR OTA: STEFANIE FUGATE, ANN GREEN AND DO: VIRGINIA
BRANDON

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAID ET
SUBJECT: US TREASURY TAX PROGRAM TERMINATED - WORK STILL TO BE DONE

1. SUMMARY: Since a U.S. Department of Treasury advisor began
working with Ethiopia's Federal Inland Revenue Agency (FIRA) to
improve its audit and collection programs in March 2004, FIRA has
increased revenue collection by over 65 percent. While the
assistance has shown tremendous results - largely through training
in audit programs, where Treasury advice has been implemented -
including increasing revenue collection by billions of birr,
budgetary constraints have required the Department of the Treasury
to end the program. Ethiopia's tax system still requires work and
technical guidance to increase the government's revenue collection
capability. Post would strongly support the continuation of this
program or the establishment of a successor program, if funding can
be located and FIRA implements Business Process Re-engineering
(BPR). END SUMMARY.

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SUCCESSFUL TECHNICAL ASSISTANCE
--------------------------------
2. By all accounts, the technical assistance to FIRA has produced
some notable successes. The work plan was based on training FIRA
personnel to become self-sufficient and able to teach others in the
future. At the beginning of the program there was a moratorium on
audits. Despite this, Treasury forged ahead in training FIRA's
auditors and developed an audit manual. The moratorium was lifted
in December 2005, and auditors are now securing significant revenue
to government coffers through their training in auditing methods,
case file documentation, and basing audits in Ethiopia's tax law.
Additionally, FIRA auditors have spread their knowledge by training
all auditors in each of Ethiopia's nine regional tax
administrations.

3. The technical assistance has not been as successful in the
collections department due to a lack of staff (there are only 20
collectors for a country of over 70 million people) and resources
(such as telephone and transportation). Nevertheless, training in
collections has shown some modest results. In the Ethiopian fiscal
year 2005, FIRA collected 355.72 million birr (nearly 4 million USD)
in delinquent taxes, and in FY 2006 collected over 2 billion birr
(about 220 million USD) more in total revenues than in the year
before. While not all of the increase can be attributed to the
Treasury technical assistance, clearly improved audit and collection
practices have played a part. (NOTE: The increases are particularly
significant given Ethiopia's status as a low-income country heavily
dependent on donor nations for budget support. Any increase in tax
revenue can be seen as a stimulus for economic development and
offset dependence on foreign aid and transfers to fund public
services. END NOTE.)

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A FLAW IN THE SYSTEM
--------------------
4. Treasury representatives identified a feature of Ethiopia's
decentralized tax collection system that allows significant amounts
of tax to remain uncollected. FIRA is responsible for collecting
value added tax (VAT) and corporate taxes. Collection of taxes on
individuals and sole proprietors falls to the 11 city and region tax
entities in Ethiopia. FIRA and the other 11 tax collecting entities
in Ethiopia are separate entities under the federal Constitution,
and therefore a comprehensive audit including the corporate and
individual entities cannot be made by FIRA. Thus, if FIRA finds
evidence in an audit of VAT or corporate returns that indicates tax
is owed on individual or sole proprietor taxes, they can not pick up
the returns for audit and make sure the tax is paid. Hence millions
of birr are unreported and unpaid. Because their chains of command
are different, there is little cooperation between the tax
administrations.

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ADDITIONAL WORK NEEDED
----------------------

5. While the Treasury program has achieved significant results, and
met the 2007 objectives, additional work remains. Treasury Advisor
Ann Green has specifically highlighted needs in taxpayer service,
internal audit, appeals, international matters and specialized
auditing. Additionally the city and regional tax administrations
need assistance to more thoroughly collect revenues due and reduce
their dependence on transfers from the central government. FIRA is
undergoing Business Process Reengineering (BPR), which is expected
to increase its operating efficiency. The U.S. Treasury Department
stated that a positive outcome of BPR may make FIRA better able to
compete for limited Office of Technical Affairs funds.

6. COMMENT: While tax collection in Ethiopia faces multiple
challenges ranging from structure to staff to lack of basic
resources, the impact of Treasury's training and assistance can be
seen in the bottom line of increased collections. The impact of
this program will continue as trained personnel provide training to
others. However, there is still important work to be done in

ADDIS ABAB 00003323 002 OF 002

improving FIRA's capacity. While post does not have resources to
fund continuation of the project, post would support continuation of
the technical assistance if additional funds can be located from
another source. END COMMENT.

YAMAMOTO

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